Despite the 2008 crisis, the vast majority of investors continue to participate in securities lending - albeit with an especially keen eye on risk management. Tim Smollen, global head of agency lending at Deutsche Bank, speaks about the European firm’s space in the securities lending market and shares insights on emerging trends.
SLT: Could you talk a little about Deutsche Bank’s position in the market?
Tim Smollen: Deutsche Bank securities lending delivers customised lending solutions to a select group of sophisticated global clients where the underlying tenet is superior risk management and client service. We sometimes describe ourselves as the “anti-black box” provider because we start with a blank sheet of paper and create a customised securities lending programme for each client.
Clients hire us because we are able to differentiate ourselves from other providers such as third party programmes or custodial agents. We are unique in many ways. To begin with, we have an integrated business model where all functional teams sit together as a cohesive unit with one agenda, the client. Additionally, we have the advantage of being a premier European bank with a global footprint and a strong balance sheet and capital base. Indemnities in our industry are only as good as the balance sheet that backs them up. Therefore, we have the best of all combinations - the nimbleness and client focus of a small specialist firm backed by one of the world’s strongest financial institutions.
SLT: Have you made any major changes since arriving back at Deutsche?
Smollen: We’ve accomplished a lot over the past two years in terms of taking advantage of Deutsche Bank’s resources. We’ve insourced term reinvestments to Deutsche Asset Management, which entailed transferring a couple of our securities lending portfolio managers to the Deutsche Asset Management investment teams in New York and London. As a result, our clients have unfettered access to one of the largest liquidity managers in the world, replete with multi-currency reinvestment expertise. This positions us to manage legacy reinvestment assets that transition to us with new mandates, which is an important capability given recent market events. Investors with problematic reinvestments can count on tremendous support and attention when they hire us. Lastly, our business leverages a number of the bank’s global markets risk management applications, which we believe give us significant competitive advantages.
SLT: Have you encountered any surprises since you returned?
Smollen: We did not anticipate that clients would be mandating us for both custody and lending. As you know, Deutsche Bank is not a global custodian but instead offers domestic custody in many markets in Europe and Asia, which is called Direct Securities Services. Institutions like sovereign wealth funds and central banks are awarding us specific markets for both services. We did not expect to be back in the custody lending business, but it certainly fits into Deutsche Bank’s larger strategy and we are pleased to provide these clients with our unique approach to third-party lending. We interface seamlessly with 35 custodians, so this dovetails well with our business model.
SLT: What are you seeing in the market?
Smollen: Coming out of the crisis, the vast majority of investors continue to participate in securities lending. However, many are formally, or even informally, re-evaluating their lending strategy and service providers. As part of that updated strategy, policies and guidelines that are now outdated are being retooled for “intrinsic value” lending. There’s a strong trending or interest in cash reinvestment indemnification, collateral flexibility (eg, non-cash collateral) and moving cash reinvestment responsibilities in-house. We also speak with many prospects with “legacy” reinvestment holdings that require expertise and monitoring.
Decoupling securities lending from custody can be considered “best practice” these days. This is encouraging to clients that have historically lent via their custodian exploring non-custodial or multi-provider strategies for the first time. Many clients are realising that their relationship pricing is outdated and that they need to explore options for fiduciary reasons, as well as strategy optimisation.
SLT: Is your clients’ attitude to risk changing in response to the events over the past couple of years?
Smollen: Our clients tend to have extremely conservative programmes. That being said, we currently have a contained client base, which helps us to head off any mounting concerns. We’re all about access to the management team and transparency, so we issue market commentary specific to ongoing events and back that up with frequent regular contact. Our client service teams are experts in securities lending rather than custody administrators, which means anyone who answers the phone knows the client and can respond to complex securities lending enquires. This gives our clients a sense of confidence in how we manage the business.
SLT: Are your clients focusing on any particular markets or sectors?
Smollen: Our client base is domiciled throughout the world, so it’s extremely important that we be able to service every asset type in both mature and emerging markets, from global equities to all fixed income instruments. A universal theme is our clients want to extract “intrinsic value” in the assets they own, wherever they are invested. In particular, access to our management team is important to our clients who tend to be sophisticated lenders who want a detailed understanding of how Deutsche Bank optimises returns and manages risk in the markets in which they invest.
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